Opinion: Becoming the Next China Won't Blunt India's 2023 Slowdown

It's not immediately obvious that the global slowdown has also arrived in India: Investments in factories, roads, and other fixed assets are just shy of 35% of domestic output; they haven't been this high in 10 years. Loan demand is growing so fast that deposits can't keep up.

What's driving India's animal spirits amid a worldwide malaise? Some of it is a result of the economy reopening fully. Contact-based services like travel and hospitality came back sharply from their pandemic funk in the first half of the year, fueling optimism. The other oft-cited reason is what multinational corporations refer to as their "China+1" strategy.

Global manufacturers have taken note of the violent protests by locked-down workers at Apple Inc.'s most important iPhone assembly plant in China. Their search for risk mitigation is bringing them to the second-most-populous nation, which is offering generous subsidies for making everything from semiconductors and solar panels to electric-vehicle batteries and textiles. It's a compelling combination of push and pull.

But China+1 is not going to be of much help in averting a near-term economic slowdown. For one thing, the ramp-up in capital expenditure has been driven by the federal government. Persistent above-target inflation gave it extra tax resources, and it pumped them into infrastructure. The private sector followed suit, even though it faced a margin squeeze from not being able to fully pass on higher costs to consumers. India's banks, eager to bulk up their post-pandemic asset books, have been more than willing to help firms tide over their cash-flow crunch. As a result, the combined capital expenditure by the federal and state governments as well as large publicly traded companies this fiscal year may exceed 21 trillion rupees ($258 billion), double the annual investment rate between 2016 and 2018, according to ICICI Securities.